Fallacy Run Amok

by Jeffrey A. Tucker

Fed up with the patent craze, The Economist Magazine wrote the following in a main editorial: "The granting of patents 'inflames cupidity', excites fraud, stimulates men to run after schemes that may enable them to levy a tax on the public, begets disputes and quarrels betwixt inventors, provokes endless lawsuits … The principle of the law from which such consequences flow cannot be just."

It's not in current issue. That was published in 1851, but every word of it remains true today. It was once conventional wisdom among economists that state-granted monopolies were as bad as mercantilism. But in the meantime, sometime after the middle of the 20^th century, the conventional wisdom became confused.

The source of the problem was a mechanistic view of the market embodied in the idea of general equilibrium theory. It is a theoretical picture of what the macroeconomy looks like when all the dust is settled.

Demand and supply perfectly match. The prices of all things have been competitively bid down to their cost, so there are no profits. All prices are a given and all markets are cleared. There is perfect information, perfect rationality, no uncertainty no transaction costs or any other costs. Indeed, there is no activity at all. All the world is made of perfectly satisfied robots.

It's a mathematical notion only but once it is embedded in your head as a picture of a perfect economic world, it is not a small step toward using it as a benchmark for the whole of economic theorizing. It turns out that the case for patents and copyright is bound up with this theoretical notion, and Boldrin and Levine's 7^th chapter of Against Intellectual Monopoly has the authors grappling with the problems with this idea.

Joseph Schumpeter was an advocate of patents precisely because he couldn't shake the general equilibrium idea out of his head. He sought to account for how change happens under general equilibrium, and settled on a theory of entrepreneurship that imagines an innovation that shakes up the dust before it settles into a new pattern (Rothbard called this "Breaking Out of the Walrasian Box").

With his benchmark, imitation would be as a costless as any other activity, so it seemed necessary for the innovator to have an exclusive for a period in which profits could be earned. Otherwise, the creative destruction necessary for social and economic advance can't take place.

Well, the core problem here is that general equilibrium has nothing at all to do with the way an economy works, as the Austrians have pointed out for half a century. There are costs to every action, pervasive uncertainties in all aspects of life, entrepreneurship is inherent in all action, and the clearing of markets takes place over time and through a process of ceaseless trial, error, and change.

It is a fascinating idea that the core reason why economists have only recently begun to look critically at the problem of IP is due to the triumph of the general equilibrium construct and the associated mathematicization of the profession that excludes the possibility of modeling central features of real-world markets. We can chalk this up as yet another cost associated with the refusal of the profession to fully absorb the ideas of Menger, Mises, and Hayek.

Thus is the core theoretical problem with those who believe that innovation cannot occur in absence of IP law: they assume a world in which all the hard stuff of life is a snap. In fact, imitation is costly and takes time. It requires effort. Even if a process or product is perfectly imitated, getting the product to market is a far more serious hurdle than simply copying something. It took a hundred years for the process of silk making to be imitated successfully. Even to this day, most of the world cannot figure out how to make a decent cup of espresso.

And even the possibility of quick and easy imitation doesn't strip away the profits associated with being first to market. I'm pretty good at making ice cream, and I could probably replicate the Moosetracks recipe over the course of a weekend of experimenting. But it isn't the Moosetracks trademarks, copyrights, and patents, that prevents me from doing it. It is because I have better things to do, and bringing anything to market has huge opportunity costs.

Even if competitive but nearly identical products make it to market, that doesn't necessarily mean that the first mover cannot maintain a profit stream. The authors cite the case of TravelPro, the suitcase with the handle that has thousands of imitators. Yet even now, TravelPro does a booming business. Take a look at how: ceaseless innovation, marketing, brand recognition, and competitive pricing.

If you take the arguments of the IP advocates seriously, you would never be able to figure out how there could be a thriving market for pizzas. There are high start-up costs (buildings, employees, ovens, drivers, technique) and yet there is a very low marginal profit associated with selling each one, a product that can be imitated by anyone. Surely there must be a recipe copyright, a patent on the pizza, a monopoly of providers, in order to make sure that someone is willing to undertake this task. And yet look around: there are dozen places you can call to bring you a pizza to your desk in twenty minutes.

Another argument concerns the idea of overgrazing. If you put ideas into the commons, they will be overused and degraded the same as regular property. This is true with real property. Public schools, public roads, public lands, and the like, are all overutilized and fall into disrepair for lack of any economizing mechanism that allows rational allocation.

What about intellectual property? The Disney Corporation says that its IP in Mickey Mouse is designed to prevent overgrazing, that if he went into the public domain, he would be drawn as catfood or placed in unseemly settings. Its currency would be debased.

Of course you can make the same argument about anything, such as pizzas or all food, but there is no question that while an imaginary pizza and food monopolist would be worse off under competitive conditions, society is most certainly better off because anyone can make a pizza or make food. The authors make a further telling point in passing: when some good or service today is label as Mickey Mouse, it is certainly not intended as a compliment. So despite the monopoly, the cartoon figure has certainly been degraded.

Many pro-IP arguments boil down to beliefs that something is either going to be undersupplied or oversupplied on a competitive market. In other words, this is the same argument used for all forms of claims about "market failures."

I can recall that there was great controversy when the first books about medical information and pharmaceutical drugs came on the market. Shouldn't doctors and pharmacies hold the monopoly? Somehow, however, everything worked out. We buy books, look up medical information online, and still go to see the doctor.

All providers are annoyed by competition. College professors are not entirely thrilled about Idiots and Dummies Guide but sometimes a colleague breaks ranks and writes one. This is just part of the rough and tumble of life in absence of general equilibrium.

February 4, 2009

Jeffrey Tucker [send him mail] is editorial vice president of www.Mises.org.

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